Case Report – Session 3
This report provides a qualitative analysis of the Loewen case study, starting from the excessive debt policy used in its expansion and ending with huge debt ratios and bankruptcy.
The analysis includes the effect of the company’s policy and the financial distress it caused and results of such a financial condition.
Method of Analysis:
For the analysis we have used the historical financial data of the company, the history of the company and its financing policy, and the financial data of its competitors.
The important finding that were gathered are listed below * Debt financing is considered the fastest and cheapest method in financing …show more content…
Interest Coverage: By 1998, the interest coverage ratio dropped from 1.6 to 0.4, indicating that Loewen was having a difficult time making interest payments on its long term debts. Interest expenses had gone up by 100% from 1996 to 1998. ($91 M to $182.3M)
Industry downturn: Loewen management blamed a part of their problems on the declining death rates in 1998, but it is seen that its major competitors have managed the situation well, and even earned more than in 1997.
Impairment expenses: In 1998, Loewen group recognized asset impairment expenses to the amount of $659.2 M, which reflects the write-down of properties to fair value, mainly the investments in Prime Succession and Rose Hills properties.
This shows us that Loewen was too aggressive in its acquistion strategy and in its zeal to compete, it ended up paying far too high a price for these two acquisitions.
This is also evident from the fact that after these two acquisitions, Loewen’s debt/equity ratio reached 1.4:1. At this point SCI realized that Loewen was overvalued and dropped its bid for acquisition.
Mississippi lawsuit: Loewen’s downfall can be attributed, in part, to the unfavourable jury verdict in Mississippi in 1995. By reneging on an agreement to purchase properties worth around $10 M, the company was held liable to damages amounting to $500 M at the time of the verdict.
The stock price dropped by 15%,